Warning on £66bn public bank stakes
Taxpayers may never see the return of the £66bn spent on shares in Royal Bank of Scotland and Lloyds Banking Group…
The article is quoting from the Public Accounts Committee report on the sale of Northern Rock. A sale in which, by the way, we, the tax payers lost £500 000 000. But what’s half a billion eh? Just a few schools, a few hospital beds , a few university research grants. Nothing important. The report concludes it is likely that the tax payer will lose more on Northern Rock up to £2 billion in total. More losses: More enforced austerity form the Austerity Enforcement Party.
What worries the report’s authors more than Northern Rock, however, is that they do not think, if the sale of Northern Rock was anything to go by, that there will be any great market enthusiasm for buying from the government the taxpayers’ controlling stake in RBS and large share of Lloyds. As the report stays with commendable understatement,
The lack of competition does not fill us with confidence that the taxpayer will make a profit on the sale of the two banks which remain in public ownership, RBS and Lloyds. There is a risk that the £66 billion invested in RBS and Lloyds may never be recovered.
If only the £66 billion loss were the end of it. But it won’t be. Both RBS and Lloyds are still sitting on yet more undeclared losses. Back in the spring of this year, 2012, PIRC the shareholder advisory group, wrote a report arguing that many, if not all, the major British banks were using accountancy rules (mainly Mark to Model) to overstate their profits and understate their losses. In June the Telegraph reported,
UK banks sitting on £40bn of undeclared losses
Royal Bank of Scotland (RBS) was in the worst condition, PIRC found, with £18bn of undeclared losses that would wipe out more than a third of its capital buffer and potentially force the 82pc state-owned lender back to the taxpayer for another rescue.
HSBC had ($16bn) £10bn in undeclared losses, Barclays £6.7bn, Standard Chartered $3.6bn (£2.3bn) and Lloyds Banking Group £2.9bn. PIRC presented its numbers to all the banks and said none disputed them. (my emphasis)
These losses haven’t been recognized but are there. They are real. They are simply being papered over by officially sanctioned acounting rules. But should the tax payer ever try to sell its stake in these moribund money-pits the losses would surface. No bank would be fooled by the pretence for the simple reason that they are using the same trick themselves. What the government really needs is an idiot. Someone stupid enough to buy a rotten bank. Now who could they possibly find?
Spain has the answer. Spain had exactly this problem with its own Frankenbank, Bankia. Bankia was sewn together from the decaying parts of Spains deceased Caja system. Once Bankia was created, the government was desperate to privatize it.
To that end the newly appointed head of Bankia, Mr Rato, stood up and said, that Bankia was, I quote from the official Press release,
solid, healthy and with a vast capacity for generating resources, a factor that has already proven its values on the market.
The Bank even posted a €44 million profit. Bankia, through its network of Caja branches then aggresively sold its shares to its own customers. 120 000 of them bought the lies. You can read more about Mr Rato, Bankia and the rot in Spain in The Eurofiscal Corruption Contest – The Spanish Entry.
Since then, Bankia has posted a €7.05 billion loss for the first nine months of this year. As for the poor people who bought Mr Rato’s lies, well the shares they bought have lost 70% of their value since listing in 2011.
So there is the answer for the UK government. My guess is the government will either try to sell shares in RBS and Lloyds directly to the public, or in the case of RBS buy the rest of the bank first, nationalizing it, and then sell. Nationalizing it first would allow the government to split off the worst parts of RBS’s debts, leaving them on the public’s purse forever, and then privatize the ‘new, clean’ RBS. This way the public would buy the bank twice (that is what privatizing is – you buy shares in something you already own) AND leave the tax payers to pay off all the bank’s worst losses as well. Of course it won’t sound like that when they come to advertize it. Much like Mr Rato’s Bankia didn’t sound bad.
Of course I am presuming a ‘new’ Bankia style RBS wouldn’t make money. What are my grounds for that? Several actually. First, if anyone thought RBS was going to make money the Public Finance committee might have said so. Second, if anyone thought RBS was going to make money they would be buying its shares right now. The shares are low. They might not look it but they are.
It really looks like the shares jumped up in June doesn’t it? They didn’t. What happened is a share consolidation. The bank exchanged 10 old shares for 1 new one. Each share was then worth ten times more, but everyone had a tenth as many shares.
The bottom line is, that for the government to make ANY money on the shares it bought for us, the share price will have to rise to OVER 500 pence a share. Fat chance. They are about 280/share at the moment.
But maybe they’ll go up? After all aren’t the banks healed and the recession over? For the banks I refer you back to the report on the banks’ £40 Billion in still undeclared losses. For the economy I refer you to the reports that the whole Euro zone (including us) is now officially back in recession. And one more thing, let’s talke a quick look at UK debt. The reality is NOT as the government would have you believe.
The composition of UK debt—how much is owed by different sectors of the economy—diverges from that of other countries. While the largest component of US debt is household borrowing and the largest share of Japanese debt is government debt, the financial sector accounts for the largest share of debt in the United Kingdom. (My emphasis)
UK debts are NOT, simply, officially, utterly undeniably, NOT due to rampant and out of control public sector spending and borrowing. The report goes on,
Although UK banks have significantly improved their capital ratios, nonbank financial companies have increased debt issuance since the crisis. British financial institutions also have significant exposure to troubled eurozone borrowers, mainly in the private sector.
I talked about how the banks have improved their capital ratios in recent posts. Needless to say it is more smoke and mirrors than anything else. It is, however, the ‘non-bank financial companies’ which is the red flag. These are the asset managers, Hedge funds, Pension funds and financial insurers of every sort who have been – ‘helping’ the banks with their bad assets and regulatory capital. And much of the money they have spent taking on new debts is money they or their customers borrowed from…the banks. So what do you think, is the UK financial sector in robust good health and on a prudent and firm foundation?
To return to bank versus public debt for a moment. This is such a vexed issue, not least because our government, in fact all Europe’s governments, have seized this moment to insist that it is public spending which is the problem and cuts to public spending are therefore the only answer. The McKinsey report flies in the face of the goverment’s argument. And the McKinsey report is not alone. In November 2010 the well known left-wing, hot-bed of revolutionary agitation that is known as PricewaterhouseCoopers (PwC) released its usual report on the UK’s economic outlook. This is what PwC found.
- Total UK debt was around 540% of GDP at the end of 2009, up from around 200% of GDP in 1987.
- This large and persistent rise in total UK debt has been driven by property-related borrowing by both households and non-financial companies and (most dramatically since 2000) by sharply rising lending between financial institutions.
- By comparison, UK government debt was relatively low and stable as a share of GDP from 1987 to 2007 and, despite rising sharply due to the recession, was still less than a sixth of total private sector debt in 2009. (My emphasis)
… households, private companies and financial institutions rather than increasing public debt, which only started to rise materially during the recent recession. (My emphasis)
In short, David Cameron and George Osbourne are politcally motivated liars or stupid or both. And here is a graph to prove it.
Where in this graph is the run-away public spending and indebtedness? Where do we see the country being run into the ground by public borrowing? Where is the evidence to say our debt level is all due to an orgy of people taking on debts they couldn’t afford? The lines for BOTH government and household debts show a modest increase in debt. It is in Financial Companies that nearly ALL the increase occurs. FACT.
Remember this graph was produced by one of the auditors of the banks. One of their own in other words.
This has nothing to do with party politics nor petty BS ideology either. It is data. The fact that it blows out of the water the ‘austerity is necessary to reign in out of control public spending’ is not party political nor ideological either. It is just ‘fact’, that happens to be inconventient for those who peddle the lies.